Asia Program

Co-hosted by the National Bureau of Asian Research

May 04, 2010

It is a great pleasure to speak today at the National Bureau of Asian Research and to discuss pipeline development in Eurasia. Two of the biggest developments in the region involve Chinese investment in Central Asia and cooperation with Russia regarding energy resources. Some analysts have predicted a future in which China competes with Europe and Russia for limited Central Asian resources, and also in which China competes with Europe and the rest of Asia for Russian resources. We do not believe, however, in zero-sum games, and we do not subscribe to this view. The vast oil and natural gas resources in Russia and Central Asia will play an important role in the long-term energy security of both their Eastern and Western partners.

Increased interdependence of national economies has raised the stakes on obtaining secure and stable energy supplies and ensuring sufficient resources for growing economies. One of the most important components of a secure energy supply is diversity. Primarily, we want to encourage the development of new oil and gas resources, while promoting efficiency and conservation in the use of all energy resources. New supply in one place naturally frees up supply in another. Additionally, we want to help producer countries find new routes to market for their oil and gas. By increasing production and expanding the number of export routes, producing countries can increase competition for their resources and improve energy security for themselves and consumers by selling into broader markets.

China is at the heart of this global energy security debate. We know that China's energy demand is rising dramatically. As the second largest energy consumer (behind the United States) and given future projections of rising demand, China will need additional hydrocarbons and to expand its nuclear energy and renewable energy sources to fuel its target of 8 to 10% GDP growth rate per year. Coal remains China's primary energy source and currently comprises 70% of its total energy mix. The PRC has recognized that demand is outpacing domestic and imported supply, and has proposed various initiatives to obtain more supplies and to increase renewable resources while at the same time addressing the environmental impact of coal.

Natural gas is one option which China is pursuing. Gas produces only about half the emissions of coal. It offers a means for reducing carbon emissions by partially replacing coal and supporting the global objective to combat climate change. Currently, natural gas makes up a small (less than 4%), but increasing share of China's primary energy consumption. However, by 2025, Chinese demand for natural gas is forecast to double from 100 bcm per year to about 210 bcm a year, requiring that China import about 35% of its total natural gas needs.

Where will this new gas come from? There are several possibilities which include: domestic production, Central Asia, Russia, Australia, and others.

Given China's close proximity to the large Central Asian reserves, China is becoming an increasingly important player in the exploration and development of gas in Uzbekistan, Kazakhstan, and Turkmenistan. These countries provide a rich source of natural resources and offer a land route for China's hydrocarbon imports, most of which currently pass through the narrow Straits of Malacca. In Uzbekistan, China is now its second largest trading partner after Russia. In Kazakhstan, China completed an oil pipeline which transports 200,000 bpd of crude from Kazakhstan to western China, paid $4.1B to take control of Petro Kazakhstan, and signed a joint venture with KazMunaiGas to purchase MangistauMunaiGas. In Turkmenistan, China opened a pipeline in December which has effectively ended what was once a near Russian monopoly on Turkmen gas exports. It will have the capacity to transport up to 40 bcm a year of natural gas from Turkmenistan and possibly Uzbekistan and Kazakhstan to western China.

Many view this development positively. It provides China with supplier diversity and Central Asia with better market diversity.

As I stated, we do not see energy security as a zero sum game and support ensuring that large economies' energy needs – whether it be Europe or China – are met. Some might question whether gas exports from Turkmenistan to China come at the expense of Nabucco or other Southern Corridor projects meant to supply Europe. Turkmen gas currently supplying the recently-opened Turkmenistan-China pipeline comes from onshore deposits in the eastern part of the country. It is not yet clear where Turkmen gas for European energy projects might come from, but given the economics, they are much more likely to be supplied with gas from Turkmenistan's offshore blocks. Additionally, Central Asian gas to China also frees up supplies of LNG - that might have otherwise gone to China - from the Middle East and elsewhere, which could be used to supply Europe and other parts of the world, too. Therefore, these projects should not be viewed as in competition with one another.

Now I'd like to move to another potential Eurasian supplier of natural gas to China – Russia. The growing Russia-China oil relationship is a significant development, and has expanded markedly with the completion of the first phase of the East Siberia Pacific Ocean (ESPO) pipeline from Russia to Russia's Pacific port of Kozmino, facilitating exports from the region's largest energy producer to its most rapidly growing energy consumer, as well as others in the region.

A Russian-China natural gas relationship, while currently quite small, could potentially emerge, analogous to their oil relationship. Sakhalin Island LNG is an example of an East Siberian source whose output could feed the Chinese market.

With many developments oriented towards East Siberia and Asia, it begs the question; will Russia shift the center of its energy production away from the West to the East? Once again, we do not believe this is a zero sum game.

Firstly, we see West and East Siberia as two different regions, both of which have vast resources of oil and natural gas necessary to supply their consumers.

Secondly, both Europe and Russia are reliant on one another. The former for supply of hydrocarbons, and the latter for an increasingly significant portion of its investment and income. In the future, there will continue to be diversified suppliers and routes as more production in Russia, Central Asia, and the Middle East comes on line. However, Russia will continue to be a prominent supplier of natural gas to the European continent given its location and vast reserves.

Thirdly, Russia and China, who have been negotiating for years on natural gas, would need to come to a price agreement.

Finally, shifting gas exports from Europe to Asia would require significant investment. Russia would have to balance the massive investment required for a gas pipeline to China with its other substantial infrastructure priorities.

Given that West and East Siberia will be vital to Russia's current and future exports, we see two possible steps enabling the necessary energy cooperation between Russia and East Asia, particularly China.

First, market-based, transparent, and open investment climates for both foreign and domestic firms could help speed development in these countries. This would require improving the investment climate. The topic of two-way investment (for U.S. firms in Russia and Russian firms in the U.S.) is something that we are currently discussing with Russia through the U.S.-Russia Energy Working Group, which is chaired by Secretary Chu, and through the subgroup on Energy Security, which I chair. Trilateral investment between the U.S., China, and Russia can be a component as well.

Second, a closer energy relationship between Russia and China, and trilaterally with the U.S. as well, could lead to further investments in energy, supporting a robust, market-based energy trade. While this would necessitate liberalization on both sides, it would also create commercial opportunities for a continent-wide energy market. In the meantime, there are current multilateral frameworks which should be used to promote energy security on the continent such as the Asia Pacific Economic Cooperation (APEC), the IAEA, International Partnership for Energy Efficiency Cooperation, the G-20, and the Major Economies Forum.

These steps will better enable China to meet its future energy demands, and to secure Russian hydrocarbons. Japan and South Korea have followed similar steps to obtain these resources. South Korea, in particular, has been very active in Central Asia.

While oil and gas pipelines to its Russian and Central Asian neighbors play an important role in helping China secure its energy security, we must remember that this is only one of a broad energy security strategy. As stated earlier, we strongly encourage China to focus on renewable energy and energy efficiency. The building of additional LNG import facilities in China and the emergence of Australia as a significant LNG exporter will further support a robust Pacific basin LNG market – in addition to the pre-existing LNG exports from Indonesia and projects planned in PNG and elsewhere. If shale is viable in China, it could significantly increase domestic gas production. Under our U.S.-China Shale Gas Initiative, we are trying to accelerate the development of shale gas in China to help it meet its climate and energy security goals.

In conclusion, we recognize the rising demand of Chinese energy needs and their relationship with Central Asia and Russia. Ultimately, our global energy security policy rests upon the following fundamental ideals:• Energy security is essential for economic growth. It is important to ensure that growing economies have a stable source of energy supplies and that producing nations, whether developed or continuing to develop, benefit economically from this trade. This can be achieved through an open, transparent, and competitive market. As companies invest in energy development around the world, we believe they should adopt international standards for safety and good corporate governance, and invest in the people of the region.• Diversification is the key for both consumers and producers. This enables them to handle risks in the market and ensure a stable source of supplies and incomes as economies grow and energy portfolios change. • Regional cooperation is critical for energy security and we continue to work toward this. The U.S. believes that all of these elements are vital for moving U.S. and global energy policy into the 21st century.

Thank you for hosting me here today, and I look forward to answering any questions you may have.

For more information on the 2010 Energy Security Conference, please click here.